It’s fascinating to see how one dollar from 1800, worth just over $0.04 today, could have become $2.3 million after 223 years if invested in the stock market. This truly highlights the power of investing in building wealth through long-term investments.
During the dot-com bubble and the rise of the Internet, there was a widespread belief that the Internet would transform the economy and business in unimaginable ways. This led investors to invest in Internet companies without doing proper due diligence. Warren Buffett wisely advises, “The less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs.”
Eventually, the bubble burst as most of the dot-com companies had no clear business model and they were burning through cash at an alarming rate. However, the most responsive companies to change such as Google and Amazon emerged stronger.
As investors, it’s important to look at the company’s business model and financial health such as if the company can finance itself internally. Great leaders know it’s not sustainable to raise money continuously as that makes the business vulnerable to any exogenous shocks such as recession and central bank policy.
The best business to own is one that over an extended period can employ large amounts of incremental capital at very high rates of return.
As Warren Buffet said, “we will never become dependent on the kindness of strangers. Instead, we will always arrange our affairs so that any requirements for cash we may conceivably have will be dwarfed by our own liquidity”. He understood that cash is the primary indicator of the firm’s resilience and strength.
Investing Wisely in Tomorrow’s Game Changing Opportunities
The world as we know it has increasingly become vulnerable to unpredictable events due to increasing geopolitical risks and uncertainties. Since the beginning of the war in Ukraine, there has been significant adjustment by countries reviewing their policies around energy security. We believe companies that are working in this sector are more likely to grow significantly in the next few years.
Cybercrime has become a major problem in recent years, with losses skyrocketing from $1.2 trillion in 2019 to $7.1 trillion in 2022. This staggering increase highlights the urgent need for investment in cybersecurity measures.
The ageing population is putting pressure on governments around the world. Research shows that effectively slowing the typical ageing process could contribute $38 trillion in value in a year of added life expectancy and $367 trillion in ten years. There will be one in six people over 60 in the world by 2030. By 2050, however, the world’s over-60 population will double to 2.1 billion.
We also see fintech companies are working toward making financial services more affordable and accessible to the majority of people – with the leveraging of technology such as AI to engage and simplify customers’ specific needs.
The accelerated computing and generative AI era has begun. However, this will require a lot of processing power to train large language models like ChatGPT-3. As a result, the demand for companies in the semiconductor industry will significantly rise.
With advancements in artificial intelligence, data science, manufacturing and deep learning, vehicles will also become more sophisticated. Autonomous cars are forecast to be safer than human-driven cars in the future, solving the most critical problems in our society such as green gas emissions, preventable deaths, road congestion, stress and cost. Imagine a self-driving car taking you to your destination without touching the steering wheel.
Why the Brightest Investors Are Putting Their Eggs in Fewer Baskets
Between 1926 and 2022, just 25 stocks have generated a third of all shareholder wealth. In other words, 0.1% of the businesses created $17.6 trillion in wealth. That is a clear reminder for us to always look for the 0.1% of businesses that are run by excellent management who are creative and imaginative about the future and allocating capital.
As Jeff Bezos stated, “Percentage margins are not one of the things we are seeking to optimise. It’s the absolute dollar-free cash flow per share that you want to maximise, and if you can do that by lowering margins, we would do that. So, if you could take the free cash flow, that’s something that investors can spend. Investors can’t spend percentage margins.”
That brings me to the final point the importance of investing in management with unquestionable integrity as balance sheets and income statements are subject to manipulation but the cash flow reflects the reality of the business.
Warren Buffett is widely known for his remarkable investment success, in particular, he has had twelve great winners in his career, but made the majority of his wealth from just four of those winners. This is why the YFS Intelligent Wealth Fund only targets 0.1% of businesses.
Are you ready to seize investment opportunities that will shape our future? Consider making investments now to prepare for today’s rapidly evolving landscape where innovation knows no bounds. Your investments today could impact tomorrow’s world.
Awet Ghirmay, Head of Investment Research
If you want to learn more about this topic, please find the link here.
More information about our fund can be found here: Hargreaves Lansdown or AJ Bell
Risk warnings
The value of investments and the income derived from them may fall as well as rise. You may not get back what you invest. This communication is for general information only and is not intended to be individual advice. You are recommended to seek competent professional advice before taking any action. All statements concerning the tax treatment of products and their benefits are based on our understanding of current tax law and HM Revenue and Customs practice. Levels and bases of tax relief are subject to change. This blog is based on my own observations and opinions.
